Bank crisis seemingly defies rescue

Washington  The day before Barack Obama takes office, the escalating troubles facing major banks around the world couldn’t be clearer.

On Monday, the British government swooped in to boost its stake in troubled Royal Bank of Scotland to almost 70 percent and offered to insure banks against large-scale losses on risky assets in exchange for binding agreements to lend out more money.

It was the second major British bank bailout in three months. Shares of ailing RBS, parent of Providence, R.I.-based Citizens Financial Group., lost two-thirds of their value in Monday’s trading. Shares of other European banks plunged as investors worried that one or more banks could be nationalized after RBS said last year’s losses could reach $41.3 billion — the biggest ever for a British corporation.

Officials on both sides of the Atlantic have failed to contain the most severe credit crisis in decades, which has ravaged banks in places as diverse as Ireland, Iceland and Switzerland, along with the U.S. and Britain.

Now top officials in London, Washington and Brussels are scrambling to figure out how to stop the bleeding. They are trying to find the best way to prod banks into lending out more money, struggling for a solution 18 months after the most severe credit crisis in decades sent investors reeling.

U.S. officials are talking about establishing a new government-backed bank to remove bad loans and other toxic assets from banks’ balance sheets, Treasury Secretary Henry Paulson said last week. In theory, with those assets gone, banks would be freer to make more loans.

Still, figuring out a successful strategy for how to unclog the credit markets is a vexing challenge for Obama when he takes office on today. Obama’s top economic adviser, Larry Summers, said on CBS’ “Face the Nation,” Sunday that under the new administration, “the focus isn’t going to be on the needs of banks. It’s going to be on the needs of the economy for credit.”

Obama will have a “strong message for the bankers,” adviser David Axelrod said Sunday on ABC’s “This Week.” “We want to see credit flowing again. We don’t want them to sit on any money that they get from taxpayers.”

While the British government moves closer to a full takeover of that country’s banking system, Americans are more leery of such intervention, and that’s likely to continue even with Democrats in charge of the White House and Capitol Hill, analysts say.

“We’re much less comfortable with nationalization,” said Simon Johnson, former chief economist to the International Monetary Fund and a professor at the Massachusetts Institute of Technology’s Sloan School of Management. “We’re generally more skeptical of the ability to run things better than the private sector.”

The U.S. government has so far provided $192.3 billion to 257 large and small financial institutions in 42 states and Puerto Rico in a financial bailout program that has proven extremely unpopular with the public. Now the government is facing calls to use its power to fire executives at banks that receive government aid.

“What you really need is ... a change of management in these banks,” Johnson said. “The banks have been run by incompetent bunglers.”

Last week, new cracks appeared among the U.S.’ two largest banks.

Citigroup Inc. last Friday reported a $8.29 billion loss in the fourth quarter and announced it was splitting itself in two. Bank of America reported a $2.39 billion fourth-quarter loss, hours after ironing out a deal for a fresh $20 billion government lifeline to digest troubled brokerage Merrill Lynch.